England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(MR JUSTICE LADDIE)

		Royal Courts of Justice Strand London WC2A 2LL Thursday 13 December 2001

1. LORD JUSTICE JONATHAN PARKER: This is an appeal by BST Properties Limited ("BST") against an order made by Laddie J on 15 February 2001, whereby he dismissed an application by BST that a Hungarian company ("RAP") be restrained from proceeding further upon a winding up petition presented by RAP against BST and that the petition be struck out.
2. Permission to appeal was granted by Chadwick LJ on a renewed application by way of oral hearing, permission having earlier been refused by him on the papers. At the oral hearing, Chadwick LJ was persuaded that BST had an arguable case for striking out the winding up petition based upon a contractual provision, to which I shall return later in this judgment.
3. Before Laddie J, BST was represented by counsel, Mr Stephen Acton, but at the oral hearing of its application for permission to appeal, it appeared by a director, Mr Patrick Reynolds. Mr Reynolds also appears today, seeking to prosecute this appeal on behalf of BST. On 14 March 2001 a compulsory winding up order was made on the petition. The consequence of that must be that whatever authority Mr Reynolds previously had to represent BST thereupon came to an end. Mr Malcolm Harris FCA of Messrs Valentines has since been appointed as liquidator of BST. We are informed that the Official Receiver is also investigating the affairs of BST. A letter from Helen Clements, Official Receiver, states that she does not intend to attend on this appeal in the interests of minimising costs. Mr Harris does not appear and is not represented.
4. In these circumstances a question arises whether this appeal can proceed at all and, if so, how.
5. Mr Simon Edwards of counsel, who appears for RAP, has suggested in a written skeleton argument that the appropriate course is to add Mr Reynolds as a party and, in effect, to treat the appeal as an application by him, in his capacity as a contributory, to rescind the winding up order pursuant to rule 7.47(1) of the Insolvency Rules. However, if the petition debt is found to be bona fide disputed on substantial grounds the consequence would be that RAP had no locus standi to present the petition in the first place, with the further consequence that the winding up order ought to be set aside as irregular. It seemed to us that the better course was to give liberty to Mr Reynolds to prosecute the appeal on his own behalf as an interested party, being directly affected by the winding up order, on the footing that if the appeal succeeds the winding up order will be set aside. That course also accords with the reality of the situation in that Mr Reynolds has throughout been the moving spirit behind the appeal. On that basis, I turn to the issue raised by the appeal.
6. The petition presented by RAP against BST was based on an alleged indebtedness of US$5m loaned to BST in June 1998 by a Hungarian bank ("Postabank"). RAP presented the petition in its capacity as assignee of the benefit of that indebtedness, alleging that express notice of such assignment was given to BST. The petition asserted that the said sum of US$5m was justly due and owing to RAP, with interest. The petition went on to allege that BST was insolvent and unable to pay its debts.
7. The petition was presented on 10 November 2000. On 15 January 2001 BST issued its application seeking the relief to which I have already referred. In an affidavit sworn by Mr Reynolds on 4 January 2001 in support of that application, Mr Reynolds deposes that a sum of US$5m was indeed paid by Postabank to BST in June 1998, but he maintains in that affidavit that the payment was not made by way of a loan. He deposes that it was made to BST as agent for Postabank for the purpose of enabling Postabank, by a number of complex transactions, to acquire certain properties in Spain which were owned by two Spanish companies called Parque de la Hidalga SA and Ronda Golf & Country Club SA. Those two companies were, in turn, owned by two Gibraltarian companies. Mr Reynolds asserts, in his first affidavit, that BST was incorporated specifically for the purpose of acting as agent for Postabank in these transactions.
8. Mr Reynolds exhibits to his first affidavit a number of documents relating to transactions between BST and a Mr Reckert (apparently the owner of the Gibraltarian companies) and to a transaction between the Gibraltarian companies (acting at this stage by Mr Reynolds as their attorney) and another Spanish company called Telnan SA, relating to the shareholding in the two Spanish companies referred to earlier. He also exhibits an Exchange Agreement between Postabank and Telnan (signed on behalf of Postabank on 21 June 1998 and on behalf of Telnan on 29 June 1998) whereby the two parties exchanged the shareholdings in an number of Hungarian companies. Mr Reynolds asserts in his affidavit that, by virtue of these transactions, Postabank acquired the Spanish properties, the acquisition of which was the sole purpose of the payment of US$5m by Postabank to BST. This, it appears, is on the footing that the Spanish properties, or it may be the shareholdings in the Spanish companies which in turn owned those properties, came into the ownership of one or more of the Hungarian companies, the shareholdings in which were transferred by way of exchange by Telnan to Postabank.
9. Mr Reynolds' first affidavit contains numerous references to BST's capacity as agent in receiving the sum paid by Postabank. As an example of this, I quote paragraph 31 of that affidavit which reads:

"It is therefore the Company's position that it has received no benefit from the sum of US$4,999,975 (save for the commission paid to it in accordance with the terms of its agreement with Postabank). Moreover it is clear that the Company acted solely and unequivocally as Agent for Postabank in relation to the transaction and that the Company has transferred all assets held by it on behalf of Postabank in relation to the transaction to Telnan upon the direct instruction of Mr Horvath of Postabank. These assets have subsequently been transferred back to Postabank for nominal consideration pursuant to the contract detailed at paragraph 29 above."

10. In response to that affidavit and in opposition to BST's application, Mr Andrew Wheldon, RAP's solicitor, swore an affidavit dated 12 January 2001 to which he exhibited a photocopy of an undated request by Mr Reynolds, on behalf of BST, to RAP for a loan, the purpose of which was stated to be the acquisition of a commercial loan portfolio within the European Community, security being provided by way of a charge over certain Spanish properties. Mr Wheldon also exhibited an unsigned copy of a Currency Loan Agreement dated 5 June 1998 containing an agreement by RAP to lend to BST the sum of US$5m for a period of one year, the purpose of the loan being "to extend a bridging credit to launch the Debtor's estate portfolio management operations".
11. In response to that evidence, Mr Reynolds swore a second affidavit dated 26 January 2001, in which he asserted, in effect, that the copy documentation exhibited by Mr Wheldon was no more than window-dressing, although he does state that he recalls that at the time the alleged series of transactions took place he signed a loan agreement on behalf of BST at Postabank's request. He maintains that he did so in order "to ensure that the necessary paperwork to enable the transaction to proceed was in place". He also exhibits a document entitled "Completion of foreign exchange credit agreement", dated 21 June 1998. He asserts that this agreement "clearly evidences [BST's] role in the series of transactions, and is wholly in accordance with and affirms the version of events set out in my first affidavit." In its agreed English translation, this agreement ("the Completion Agreement") provides:

"Where agreement was reached between BST PROPERTIES LIMITED ...

And

POSTABANK ...

With the following conditions:

1. Both parties declare that according to the credit agreement signed on 5th June 1998, BST borrowed 5.000.000 - USD, namely five million, USD for launching its business in property development. A third party guaranteed this agreement.

2. Using the credit and with the Bank's agreement, BST purchased the companies Abett Ltd and Benavelle Limited...."

(the two Gibraltarian companies)

"....these properties previously belonged to the company Parque de la Hidalga. Parque de la Hidalga is also the owner of the Ronda Golf association.

3. In agreement with the Bank and under the supervision of the Bank's personnel and auditors, the purchased companies' total assets were given to TELNAN SL. According to the exchange agreement signed on 20th June 1998 TELNAN SL gave these assets to the Bank, which the Bank accepted.

4. Once the companies and their assets have been given to the Bank, BST is free of any obligation. Both parties accept that the repayment obligation included in the credit agreement Section 1, is fulfilled and the third party is absolved from any liability."

12. There is then a space for the parties' signatures. A photocopy of the original Hungarian version shows that the Completion Agreement was signed on behalf of BST by Mr Reynolds.
13. Notwithstanding Mr Reynold's assertion that the Completion Agreement is confirmatory of the contents of his first affidavit, and in particular BST's capacity as agent in receiving the sum of US$5m from RAP, it is apparent on the face of the Completion Agreement that it is entirely inconsistent with that account. Thus, it proceeds upon the basis that the payment of US$5m by Postabank to BST was a payment by way of loan. It refers to a "credit agreement" dated 5 June 1998, and to BST "using the credit" in order to purchase certain companies. Condition 2 in the Completion Agreement appears to be wrong as a matter of fact, in that the Spanish companies were, it appears, owned by the Gibraltarian companies, Abett Limited and Benavelle Limited, and not the other way round. Further, the references to assets being "given" by one company to another would appear to raise a number of further questions.
14. Mr Reynolds' second affidavit prompted a witness statement from Mr Sagi of RAP. Mr Sagi exhibited to his witness statement a formal loan agreement dated 5 July 1998 in the Hungarian language and notarised in Hungary, reflecting the terms of the Currency Loan Agreement, an unsigned copy of which was exhibited to Mr Wheldon's affidavit. In a third affidavit, Mr Reynolds notes that this document bears his signature, but he deposes that he has no recollection of having signed it.
15. In granting permission to appeal Chadwick LJ referred to Clause 18 of this loan agreement in its English translation, taking the view, as I indicated earlier, that the contents of this clause afforded BST at least an arguable case for the relief which it sought on its application. The relevant provision is in the following terms:

"The parties shall attempt to settle disputes, occurring in connection with this contract, amicably; in the case their attempt is unsuccessful, they stipulate the exclusive competence of the Metropolitan Court of the Republic of Hungary."

16. I now turn to the judgment of Laddie J. Laddie J correctly identified the relevant test as being whether the petition debt is bona fide disputed on substantial grounds (see Mann v Goldstein [1968] 1 WLR 1091 at 1096G per Ungoed-Thomas J; and Stonegate Securities Ltd v Gregory [1980] Ch 576 at 580C per Buckley LJ).
17. The judge then turned to the evidence before him. He summarised Mr Reynold's first affidavit, as follows, in paragraph 15 of his judgment:

"As I have already mentioned the fundamental point made by Mr Reynolds in his first affidavit was that there never had been a loan at all. As Mr Acton put it, the paperwork was mere window dressing. The money was Postabank's money, remained Postabank's money and was used to acquire companies for Postabank."

18. The judge then referred to a number of what he described as "very surprising features" of Mr Reynolds' evidence, even if one were to take his first affidavit on its own. In particular, he referred to the undated request for a loan, a copy of which was exhibited to Mr Wheldon's affidavit. As to that, the judge said at paragraph 17 of his judgment:

"This letter, the authenticity of which is not in dispute, is written simply in terms of an application by BST to the bank for a loan facility. In support of the loan application BST says that it has supplied valuations to the bank to support the valuation. It asks the bank to make a positive decision on the loan application. This is wholly inconsistent with BST being an agent for the bank or with the bank having approached BST for the purpose of purchasing property, or with there being no loan at all, as is now BST's case. This document is only consistent with the loan agreement as put forward by the petitioner."

19. The judge then turned to Mr Reynolds' second affidavit and to the Completion Agreement. As to the Completion Agreement, the judge commented in paragraph 22 of his judgment:

"One thing that is clear about this document is that it proceeds on the basis that there was indeed a loan and what this document purports to do is to say that that loan obligation has now been fulfilled by certain subsequent transactions. In my view, it is quite inconsistent with Mr Reynolds' first version of events and inexplicably so."

20. The judge also commented that condition 2 in the Completion Agreement was factually wrong in the respect to which I have referred. The judge also referred to the evidence of a Spanish lawyer, whose statement was exhibited to Mr Reynolds' second affidavit, concluding that that statement also appeared to undermine Mr Reynolds' version of events.
21. Expressing his conclusions on the evidence before him, the judge said in paragraphs 28 to 30 of his judgment:

"28. I am prepared to accept that Mr Acton is right that the courts should allow winding up petitions to proceed where there is a clear, even if weak, dispute as to the assertions of insolvency. But, on the other hand, I do not think that this means that the court should suspend common sense when looking at the nature of the challenge to the petitioner's case advanced on behalf of the respondent company. The only documents produced by Mr Reynolds which are advanced to undermine the plain meaning of the loan agreement either do not undermine it at all or carry signs that their authenticity cannot readily be accepted. I say that in particular about the Completion Agreement. Furthermore, if the story advanced by Mr Reynolds, namely that there never was a loan in the first place was true, Mr Reynolds would almost inevitably have ensured that there existed contemporaneous documents between his company and the bank safeguarding BST's position in the future. There are no such documents. As it is, BST entered into an agreement which makes it indebted to the bank to the tune of $5 million when, according to Mr Reynolds, it borrowed not a farthing.

29. As I have said, there are no contemporaneous documents which support the existence of the agency or which support the suggestion that his was Postabank's commercial venture into purchasing Gibraltarian companies. Indeed, I must say that I think there is much to be said in Mr Edwards' argument that the explanation advanced by Mr Reynolds in his first affidavit as to why Postabank wanted to go through this alleged elaborate charade are not adequately explained.

30. In my view, there is nothing of substance which undermines the authenticity or effect of the loan agreement. It is not in dispute that no part of the loan has been repaid and it is not in dispute that BST is not in a position to repay the $5 million and interest. In my view, BST has failed to show that the petition here is an abuse of process. It has failed to show to my satisfaction that there are substantial grounds for disputing the indebtedness. To use Mr Acton's expression, the story advanced by BST and Mr Reynolds is not credible."

22. By its grounds of appeal, BST contends that the judge's decision was wrong in that his conclusion that the petition debt was not bona fide disputed on substantial grounds was against the weight of the evidence. In particular, it complains that the judge was not entitled to make what was, in effect, a finding that the Completion Agreement was a sham. It is also asserted that the judge did not have proper regard to what is described as "the low threshold test for establishing whether a debt is bona fide disputed upon substantial grounds for the purposes of the court's winding-up jurisdiction". It is asserted that the relevant test is designed to ensure that such jurisdiction is not used for the purpose of trying disputed claims which, on the material before the court, was a test which no tribunal, properly directing itself, could properly hold had not been satisfied.
23. In his oral and written submissions in support of BST's appeal, which include a helpful skeleton argument prepared by Mr Acton (BST's former counsel), Mr Reynolds effectively repeats the submissions made by Mr Acton before the judge to the effect that the judge's reasoning was faulty and that he gave undue weight to certain factors. In summary, Mr Reynolds submits that it is not appropriate for the Companies Court to form a view as to the genuineness or the effect of the various complex transactions referred to in his affidavits and evidenced by the documents which he has exhibited. He asserts that the evidence shows that BST used the money paid to it by Postabank to purchase the Gibraltarian companies from Mr Reckert, those Gibraltarian companies owning the Spanish company which in turn owned the various properties in Spain which Postabank wished to acquire. Mr Reynolds asserts that the Gibraltarian companies then sold the shareholding in the Spanish companies to another Spanish company, Telnan, which, in turn, transferred the ownership of the Spanish companies to two of the Hungarian companies which formed part of the exchange effected pursuant to the exchange agreement to which I referred earlier. By this circuitous route, Mr Reynolds asserts that the Spanish properties ended up in the ownership of Postabank, that being the sole purpose of the original payment of US$5 million to BST.
24. Mr Reynolds had confessed in his submissions before us that he finds it difficult to describe accurately the nature of these complex transactions. He submits that it is not appropriate for the Companies Court to form a view that they are, in effect, not genuine, or that they do not have the effect for which he contends. That, he submits is a matter for the courts in Hungary.
25. In this connection Mr Reynolds relies on Clause 18 of the loan contract exhibited to Mr Sagi's witness statement, which I read earlier, and which formed the basis of the grant of permission to appeal. He asserts that there are proceedings on foot in Hungary, albeit proceedings to which the company is not a party. These proceedings have, it appears, been brought by an assignee of Telnan against Postabank based upon the terms of the Exchange Contract. He submits that in the course of that litigation light will be thrown on the true nature of the transactions to which he has referred in his evidence on this application and, in particular, to the true nature of the payment of $5m by Postabank to BST.
26. Mr Reynolds submits that there can have been no sufficient commercial reason for Postabank to lend such a substantial sum to a newly-formed company, particularly since, as he tells us, the securities referred to in the loan agreement were not, in the event, taken up. He submits that, until the matter is resolved in the Courts of Hungary, RAP cannot establish that BST is insolvent and unable to pay its debts.
27. In his written skeleton argument Mr Edwards, for RAP, submits that the judge applied the right test and came to the right conclusion. He further submits that Laddie J's decision is not at all surprising given that, in his first affidavit, Mr Reynolds advanced the case that the alleged loan was not a loan at all, whereas in his second affidavit he gave a wholly inconsistent account, maintaining that although there had been a loan it had been repaid or satisfied. Mr Edwards submits that such evidence as has been adduced by Mr Reynolds in relation to the various transactions upon which he relies goes nowhere towards establishing that the original payment by Postabank to BST was anything other than a loan pursuant to a standard form loan agreement.
28. In my judgment, on the material before the court, the judge was fully entitled to conclude that the petition debt was not bona fide disputed on substantial grounds. As Chadwick LJ said when refusing permission on the papers:

"The judge directed himself correctly, that the issue for decision was whether the petition debt was disputed on substantial grounds. It was not in dispute that the sum of $5 million had been paid to the applicant by the petitioner's predecessor in title and that no part of that sum had been repaid. The documentation pointed, unequivocally, to that sum having been paid by way of loan. The applicant contended, in effect, that that documentation was a sham. That contention was advanced by the director who had signed the documentation. The judge rejected that contention as incredible. On the material before him he was entitled to take that view. I am satisfied that an appeal against his order would have no prospect of success."

29. I respectfully agree with those observations of Chadwick LJ.
30. Accordingly, it remains to consider whether the terms of clause 18 of the loan agreement should lead the court to the opposite conclusion. I cannot see that that clause should have that effect. First, it is to be noted that the clause is to be found in what his patently a loan agreement rather than an agreement for a payment to BST in its capacity as agent in the acquisition for Postabank of certain Spanish properties.
31. Secondly, and more importantly, whether or not proceedings raising a dispute as to the effect of the loan agreement could be stayed on the basis of clause 18, that does not in my judgment affect the question which was facing the Companies Court, namely whether the petition debt is bona fide disputed on substantial grounds.
32. In my judgment, for the reasons given earlier, the judge was entitled to reach the conclusion he did. That conclusion was not affected by the presence in the loan agreement of clause 18. For those reasons, I would dismiss this appeal. In the light of that conclusion, no question of setting aside or rescinding the winding up order arises.
33. LORD JUSTICE DYSON: I agree.
Order: Appeal dismissed with costs assessed in the sum of £5,000 inclusive of VAT and disbursements. (Order does not form part of approved judgment)